Italy Yield Premium Over Spain Reaches 18-Month High; Bunds Gain

Sept. 12 (Bloomberg) -- The extra yield investors demand to
hold Italian 10-year bonds over Spain’s widened to the most in
18 months as Italy’s cost of borrowing for three years climbed
to the highest since October at a debt auction.

Italian 10-year yields were about five basis points from a
two-month high amid speculation a vote on whether to expel
former premier Silvio Berlusconi from the Senate could
destabilize Enrico Letta’s coalition government. The Rome-based
Treasury sold a combined 5.5 billion euros ($7.32 billion) of
securities due in 2016 and 2028. German 10-year bunds rose along
with Finnish and Dutch securities as investors sought the
region’s safest assets.

“Significant underperformance of Italy against Spain
reflects that even though Italy is the more liquid market it has
obstacles from a political perspective,” said Norbert Aul, a
European rates strategist at Royal Bank of Canada in London.
“The ongoing Senate debate about the political future of
Berlusconi is there at the forefront.”

Italy’s 10-year yield was little changed at 4.53 percent as
of 5 p.m. London time. The rate rose to 4.58 percent on Sept. 6,
the highest since July 4. The price of the 4.5 percent security
due in May 2023 was at 100.15.

The rate on similar-maturity Spanish bonds dropped two
basis points, or 0.02 percentage point, to 4.46 percent, lower
than its Italian counterpart for a third day. The yield
difference between Spain’s and Italy’s 10-year securities
increased two basis points to six basis points, after reaching
seven, the widest since March 2, 2012.

Berlusconi Vote

The Italian Senate committee has agreed unanimously to hold
a vote on whether to expel Berlusconi from the chamber on Sept.
18, Senator Giuseppe Cucca said today.

Italy sold 4 billion euros of notes maturing in November
2016 at an average yield of 2.72 percent, compared with 2.33
percent at an auction of similar-maturity debt on July 11.

Investors bid for 1.52 times the amount of 2016 securities
allotted today, compared with a bid-to-cover ratio of 1.36 on
the 2028 bonds. The Treasury also sold 2.76 billion euros of
floating-rate notes maturing in 2018.

The “mixed” outcome of the auction may be due to
investors favoring debt covered by the European Central Bank’s
Outright Monetary Transactions program, according to Richard
McGuire, senior fixed-income strategist at Rabobank
International in London.

Under the as-yet-unused OMT, the central bank will buy debt
due in one to three years of member nations that meet certain
criteria.

‘Political Tensions’

“One might infer that against the backdrop of elevated
political tensions in Italy, the promise of OMT support becomes
more valuable - hence, the notably better results for the
shorter-dated issuance here,” Rabobank’s McGuire wrote in an e-mailed note. “Italy’s underperformance versus Spain looks set
to continue near term.”

Industrial production in Italy unexpectedly fell 1.1
percent in July, according to data today. Economists had
forecast a 0.3 percent increase, according to the median of 16
estimates in a Bloomberg News survey.

Benchmark German 10-year bund yields fell five basis points
to 2 percent. The yield rose above the 2 percent level on Sept.
5 for the first time since March 2012.

“Eye-catching yield levels are attracting investor
interest again,” said Rainer Guntermann, a rates strategist at
Commerzbank AG in Frankfurt. “It provides the market with
support and we think the recovery has a bit further to go.”

Bond Movers

ECB President Mario Draghi said in Riga, Latvia, the rise
in some money-market rates is unwarranted and that the recovery
in the euro area is still “very, very green.”

Volatility on German bonds was the highest in euro-area
markets today followed by those of France and Portugal,
according to measures of 10-year debt, the yield spread between
two- and 10-year securities, and credit-default swaps.

Portugal’s 10-year bonds declined for a third day, with the
yield rising as much as 10 basis points to 7.24 percent, the
highest level since July 17.

The yield has climbed about 2 percentage points since May
22 when Federal Reserve Chairman Ben S. Bernanke told Congress
that the central bank could cut the pace of its bond purchases
if policy makers saw indications of sustained economic growth.

“Portuguese government bonds have come under
disproportionate pressure during the global bond selloff,” said
Michael Gavin, a strategist at Barclays Capital Inc. in New
York. “The most plausible interpretation of the recent run-up
in Portuguese bond yields and spreads is that bondholders are
pricing some limited risk” of a debt-restructuring deal
inflicting losses on investors.

Italian securities returned 3 percent this year through
yesterday, according to Bloomberg World Bond Indexes. Spain’s
earned 7.9 percent, while German bonds lost 2.9 percent, the
indexes show.